Obviously no one knows for sure what affect the stimulus plan will have on each sector of our economy. The plan is not yet 100% in place and could still be modified or scrapped altogether, although it is unlikely at this point that some form will not be passed soon. We can look into the general points of the plan and make some educated guesses about its affects and that is what I will attempt to do here.
The bond markets as a whole leaped for joy at the promise of $500 Billion of Fed Reserve money being poured into mortgage backed securities; however when the figure was raised earlier this month the markets pulled back. One reason is inflation. Although right now inflation is not a key concern, long term thinkers worry that excessive government spending and debt could weaken the dollar and cause high inflation. Inflation is BAD for mortgage rates.
One the biggest factors effecting the housing market right now is unemployment. People are afraid to buy a new home because they are worried about losing their job. Most analysts or politicians, whether they agree with Obama’s plan or not, believe that it will create jobs, at least in the short term. Job creation is GOOD for housing and mortgage rates.
How will this plan be paid for by the government? More US Treasury bonds will have to be sold which should in theory hurt their price. Typically US Treasuries and Mortgage Bonds run together but they have been competing more this past year. If the US needs to sell more bonds they might have to offer higher yields and mortgage bonds might have to follow suit to compete. The is BAD for mortgage rates.
Based on what I wrote above I think rates will stay low in the near future. My best guess would be that rates should stay at 5.500% or better on fixed rates for the next 6 months. I do believe that after that they will start to rise. No one can predict the future but my guess is as good as any. I pay attention to what is happening in these markets and this is what I see right now.
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